How to Remove PMI from Your Home Loan

As the new year rolls in, many homeowners begin thinking about their financial goals for the year ahead. One common question that often comes up is how to remove private mortgage insurance (PMI) from their home loan. So let’s dive into the details of PMI and the steps borrowers can take to remove it.

First… 

What is PMI?

PMI is a premium borrowers pay on conventional loans with a loan-to-value ratio of over 80%. With this type of insurance, lenders require when a borrower to put a down payment of less than 20% on a home purchase. 

It's designed to protect the lender if the borrower defaults on the loan and is typically calculated as a percentage of the original loan amount. It’s also included in the borrower's monthly mortgage payment.

Understanding PMI as a Borrower

As a borrower, it's essential to understand that PMI is not meant to benefit you but rather the lender. PMI protects the lender in case of default, making it an attractive option for investors. Therefore, removing PMI can be a complex process and may require some effort.

The most important thing for borrowers to understand is that they need to take specific steps to remove PMI, which won't fall off automatically. Borrowers must be aware of what's at stake and take the appropriate steps to ensure they're on track to removing PMI.

How to Remove PMI

1. Let it Run its Course

When a borrower closes on a mortgage loan, they receive a payment schedule that includes a release date for the PMI. Typically, PMI will be removed when the loan-to-value ratio falls below 78% of the original purchase price. Borrowers can also ask their lender for the specific date that PMI will be removed.

2. Accelerate PMI Removal

If a borrower wants to accelerate the removal of PMI, they can call their servicer after making 24 on-time payments and request the removal of PMI. The servicer will likely require an appraisal to determine the property's current value, which the borrower will have to pay for. If the value of the property is determined to be 80% or less of the original loan amount, the servicer will remove PMI.

3. Use an Automated Model

Fannie Mae and Freddie Mac have developed an automated model called the Uniform Collateral Data Portal (UCDP), which can be used to determine the value of a property. Borrowers can ask their servicer to use the UCDP to determine the value of their property. This can be done after 24 months of payments as well as doing an appraisal. Again, if the value is determined to be 80% or less of the original loan amount, the servicer will remove PMI. 

Things to Keep in Mind

It's important to remember that PMI removal is not in the borrower's favor. Lenders will do everything possible to protect their investment, so borrowers should be prepared to pay for an appraisal if required. 

It's also important to make all payments on time and maintain good credit, as lenders will be less likely to remove PMI if the borrower has a history of missed payments or a low credit score.

Bottom Line

Removing PMI from a home loan is not always a simple process, but there are steps borrowers can take to ensure they're on track to have it removed. 

By understanding the role of PMI, and the steps involved in the removal, borrowers can be prepared to take action when the time is right. For an even more intensive analysis of PMI and exclusive strategies to remove it, tune into the latest episode, where I’ll guide you step-by-step and reveal facts no one is telling you.